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Credit Growth and the Financial Crisis: A New Narrative

Stefania Albanesi (), Giacomo De Giorgi () and Jaromir Nosal

No 12230, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A broadly accepted view contends that the 2007-09 financial crisis in the U.S. was caused by an expansion in the supply of credit to subprime borrowers during the 2001- 2006 credit boom, leading to the spike in defaults and foreclosures that sparked the crisis. We use a large administrative panel of credit file data to examine the evolution of household debt and defaults between 1999 and 2013. Our findings suggest an alternative narrative that challenges the large role of subprime credit in the crisis. We show that credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high risk borrowers was virtually constant for all debt categories during this period. The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors. We argue that previous analyses confounded life cycle debt demand of borrowers who were young at the start of the boom with an expansion in credit supply over that period. Moreover, a positive correlation between the concentration of subprime borrowers and the severity of the 2007-09 recession found in previous research may be driven by the high prevalence of young, low education, minority individuals in zip codes with large subprime population.

Keywords: subprime debt; credit boom; housing crisis; financial crisis (search for similar items in EconPapers)
JEL-codes: D14 E01 E21 G01 G1 G18 G20 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-mac and nep-ure
Date: 2017-08
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Working Paper: Credit Growth and the Financial Crisis: A New Narrative (2017) Downloads
Working Paper: Credit Growth and the Financial Crisis: A New Narrative (2017) Downloads
Working Paper: Credit Growth and the Financial Crisis: A New Narrative (2017) Downloads
Working Paper: Credit Growth and the Financial Crisis: A New Narrative (2016) Downloads
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